Kuban power and electrification public joint stock company (Kubanenergo PJSC) Approved: By the decision of the Board of Directors Kubanenergo PJSC Minutes No. 273/2017 of the 12th of May, 2017 By the decision of the annual General Meeting of Shareholders of Kubanenergo PJSC Minutes No. 39 of the 20th of June, 2017 The Annual Report 2016 on the Kubanenergo PJSC Progress for the Annual General Meeting of Shareholders General Director A.I. Gavrilov Kubanenergo PJSC Chief Accountant I.V. Skiba and Head of Financial Records, Accounts and Tax Returns Department Krasnodar, 2017 1 About the Report Mission of Kubanenergo PJSC Mission of Kubanenergo PJSC is to make profit under the terms of long-term provision of reliable, high-quality and affordable electric power for customers of Krasnodar Krai and the Republic of Adygea by organizing the most efficient management of the distribution grid infrastructure using advanced technologies and innovations with account of global standards of the quality of the provided services and the best practice of corporate governance. About the Concept Information on how we complete our major strategic task — to ensure reliable energy supply for customers and how we plan to make success in future is disclosed on pages of this report. Concept of the annual report reflects importance of reliability in Company activities. We understand reliability as force, confidence, responsibility, sustainability, trust and experience. We have issued this report using paper graphics to demonstrate that pages and figures of the report stand for people and the Company with reliable nature. 2 This annual report includes the results of the activities of Kuban power and electrification public joint stock company for the year 2016, as well as certain important developments in the Company’s activities, which took place after the reporting date - in the period from 01.01.2017 to the preliminary approval of this Annual Report by PJSC Kubanenergo Board of Directors on 11.05.2017. For the purposes of this document, Kuban power and electrification public joint stock company is referred to as Kubanenergo PJSC, Company and, for the period before June 22, 2015, OJSC Kubanenergo. PJSC Rosseti (OJSC IDGC Holding before April 4, 2013 and OJSC Rosseti from April 4, 2013 to July 17, 2015) and other legal entities are referred to in the form relevant for the period stated in the text. Disclaimer This annual report (hereinafter the “Annual Report“) has been prepared with the use of information available to Kubanenergo PJSC and its subsidiaries at the time of its drafting. The Annual Report also includes information relating to productive and economic activities of the Company in the future based on estimates and forecasts of the Company’s management and made on the basis of the current situation. Due to various objective factors, the actual results of the activities may differ from these forecasts and assessments. The Annual Report contains certain forecasting statements in relation to economic activity, economic performance and financial status of the Company and its plans, projects and expected results. The Annual Report may also contain evaluations of trends in the changes of prices for services/products, volumes of production and consumption, costs, estimated expenditure, development prospects and other similar factors, as well as forecasts in respect of the development of the industry and markets, start and end dates of certain projects for the Company’s activities. Words such as “intends”, “seeks”, “designs”, “expects”, “evaluates”, “plans”, “considers”, “supposes”, “may”, “should”, “will”, “will continue” and other similar words and words derived from them usually indicate the forecasting nature of a statement. Forecasting statements, by their nature, are connected to inherent risks and uncertainties, both general and specific. There is a danger of forecasts, projects and other such statements not coming to fruition. In the light of these risks, uncertainties and assumptions, the Company warns that the actual results may significantly differ from the values valid only at the time of drafting the Annual Report, which are expressed directly or indirectly in forecasting statements. The Company does not definitely state and does not guarantee that the results indicated in the forecasting statements will be achieved. The Company does not bear any responsibility for any damages that may be incurred by physical or legal persons who relied on such statements. In each particular case, such forecasting statements constitute only one of the ways events can develop, and should not be seen as the most likely ones. Except as expressly provided for by the law, the Company is not obligated to publish updates and changes in such statements, either on the basis of new information, or on the basis of subsequent events. 3 Key Performance Indicators Change of Units of Indicators in Measureme 2014 2015 2016 2016 as nt Compared to 2015, % Financial Results Revenue RUB mln 29,393.4 35,704.2 41,726.2 +16.9 including: - from electric power RUB mln 28,464.2 34,403.0 39,262.4 +14.2 transmission services - from services of technological RUB mln 847.8 1,213.3 2,380.5 +96.2 connection Net cost RUB mln 29,918.8 33,149.3 35,927.8 +8.4 Net profit (loss)* RUB mln –3,632.3 1,452.5 2,140.5 +47.4 Return on equity % –11.55 4.69 6.32 +1.63 Return on assets % –5.92 3.52 5.33 +1.81 Cash at the end of the year RUB mln 7,071.0 2,577.5 1,245.6 –51.7 Long term loans and borrowings at the end of the RUB mln 14,900.0 10,000 18,912.2 +89.1 year Short term loans and borrowings at the end of the RUB mln 2,517.0 7,071.0 79.1 –98.9 year Deployment of capital RUB mln 9,177 8,329 4,913 –41.0 investments Operating Indicators Total length of overhead and cable power lines (circuit km 89,793.8 90,420.63 90,661.0 +0.3 length) Installed capacity of 35– MVA 9,166.10 9,446.13 9,519.1 +0.8 110 kV substations Installed capacity of 10– 6/0.4 kV substations in the MVA 4,556.83 4,643.09 4,741.06 +2.1 distribution grid Average duration of power supply interruptions per one h 5.05 4.57 4.29 –6.1 process upset Electric power supplies to the mln kWh 21,572.6 22,032.6 22,732.3 +3.2 grid of PJSC Kubanenergo Volume of power transmission mln kWh 17,081.7 17,457.2 18,059.1 +3.4 services rendered Electric power losses mln kWh 2,852.7 2,835.7 2,945.6 +3.9 Connected capacity of the MW 543 691 618 –10.6 Consumers Actual Average Staff ppl 8,364 8,326 8,428 +1.2 Headcount Structure of the Company’s Personnel by Educational Attainment: Higher professional education % 42.6 43.8 45.2 +1,4 pp Secondary and basic vocational % 36.2 36.8 39.4 +2,6 pp education General secondary education % 21.2 19.4 19.4 –4,0 pp *Taking into account administrative costs. 4 Electric Power Supplies to the Grid of Kubanenergo PJSC and Losses During Electric Power Transmission, mln kWh Dynamics of Key Economic Indicators of Kubanenergo PJSC in 2014– 2016, RUB mln 5 6 Address to Shareholders by the Chairman of the Board of Directors Dear Shareholders, In the reporting year, activities of the Board of Directors were focused on ensuring interests of shareholders of Kubanenergo PJSC, improving its financial and economic performance, enhancing shareholders’, creditors’ and investors’ confidence in the Company. In 2016, Kubanenergo PJSC held 32 meetings of the Board of Directors, resolutions on 234 items considered were made. Key issues examined during the meetings were the approval of strategic documents, ensuring of regular control of the Company’s management, and approval of transactions. New items were as follows: issue of additional shares of the Company and the Company’s charity activities. According to the resolution of the extraordinary General Meeting of Shareholders on increasing the Company’s authorized capital by RUB 5.75 bln, measures were taken to issue the Company’s additional shares, an opportunity for shareholders to exercise their preemptive right when acquiring the shares was given, thus, allowing the Company to raise more than RUB 2 bln in return for the shares placed. The Company’s capitalization for the reporting period increased almost by 1.5. In order to develop and reinforce control functions, the improvement of the risk management, internal control, and internal audit systems were determined by the Board of Directors as a priority area of the Company. The Board of Directors approved the Plan of Measures Aimed at Development and Improvement of Internal Control and Risk Management Systems of Kubanenergo PJSC for 2016–2018. Implementation of the Plan makes it possible to focus all efforts on improving the efficiency and effectiveness of the Company’s activity, the soundness of assets, the reliability of accounting (financial) and other statements, the compliance with legal requirements and local regulations of the Company, and ultimately contributes to achievement the Company’s goals and objectives. Company’s share in the regional energy market (of the region’s NGP) in 2016 amounted to 73.9%. Total supply in the region is higher than the level of 2015 and in total amounts to 26.9 bln kWh. Growth of 7 Kubanenergo PJSC NGP share in 2016 is due to increase of Kubanenergo PJSC electric grid facilities, including due to consolidation of TGC electric grid assets. In 2016, PJSC Kubanenergo continued implementing a number of major investment projects.